09 October 2017

Australia's insolvency law reforms - where to from here?

On 12 September 2017, the Government finally pulled the trigger on wide-ranging reforms to Australia’s corporate insolvency regime.

The reforms are some of the most significant changes to occur over the last decade, and will have implications for company directors, banks, and creditors.

Our National Head of Restructuring & Insolvency, Tim Klineberg, speaks to Leanne Jones at Sky News Business about these implications.


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Leanne Jones:

Welcome back. Well the second wave of insolvency reform kicked in last month, putting creditors right at the forefront. 
Well here to talk us through the suite of new reforms and where to from here is Tim Klineberg, restructuring and insolvency partner at King & Wood Mallesons.  Thank you so much for joining us today, Tim.  Firstly if you could quickly walk us through those new reforms.

Tim Klineberg:

Hi Leanne, thanks for having me.  

So, we’ve seen a wave of reform over the last 6-12 months.  Initially there were some minor reforms about the procedures and insolvency, but the big talk has really been around safe harbour and what we call ipso facto reform and safe harbour is really important because in Australia there’s always been a history of what people would consider to be blame. So the theory is that directors are nervous about taking risks and innovating and restructuring because of the insolvent trading laws which make them personally liable for debts while the company is insolvent.  

Safe harbour gives them some protection from that, it increases the scope of the defence, which the theory is it will make directors more happy to take risks and less worried about their own balance sheet as they make decisions.

Leanne:

Yeah, so good news for them really, it’s going to be giving them some more leeway if you like in terms of making some restructuring changes and so forth.

Tim:

I think that’s right and everybody who’s in an insolvency or a distressed situation is worried about risk and there’s a lot of creditors around, there’s usually a lot of pressure and I think anything that releases that pressure valve is a good thing.  

We usually look at these procedures lined up against the foreign ones, the ones that we see in America and in England that are areas that are very well known for big restructuring and I think Australia has taken on some of these elements, so safe harbour is really important because it reduces the burden, at least in theory, on directors for their risk, for personal liability.  

The ipso facto one is an important one as well.  It makes it harder for people to terminate contracts just because a company is restructuring.  And we think that’s going to have some big implications, Leanne, for trading in Australia in all sorts of different contexts.

Leanne:

Right.  So overall I mean if we look at these reforms, does it make the whole process easier for businesses here in Australia and in particular those company directors?

Tim:

I think it does.  I think anybody who works in this area of restructuring and sees directors under pressure and there’s often a lot going on.  It’s quite difficult to see the way through and I think if you don’t need to worry about personal liability or at least you can have a plan, then it helps a lot. 

The way the reforms are cast is to really try and encourage directors to have a plan, a restructuring plan and seek proper advice and really, really follow the plan through.  And the idea is if you’re acting in the best interests of creditors, you’re not going to be blamed personally if things go wrong.  That’s a broad summary of how it works.  

But again we really need to look at the ipso facto reforms as well, they’re very important, in particular for the banks and for people with trading contracts.  It’s going to make it much harder for them to walk away from companies that are in restructuring processes like schemes of arrangement or administration.

Leanne:

When you think of these laws that were in place on a global playing field, was Australia behind the ball game when it comes to those insolvency laws and how far behind the rest of the world were we?

Tim:

Well look, I actually don’t think we were that far behind and we haven’t actually caught up all the way yet.  But what you’ve got in Australia is you’ve got this entrenched culture of creditor strength.  So you’ve got very strong banks, you’ve got very strong creditor rights and then you’ve got companies that are largely in control of course whilst they’re trying to restructure.  And it’s the creditor rights that made everybody nervous.  And those rights haven’t gone away, they’re still there.  But what we’ve got is we’ve got this safe harbour so it’s really designed to keep directors safer. 

I think you look at the United States for example, foreign procedures, the Chapter 11 procedure is a court based procedure, you need to go to court and seek that protection and then you’re protected. I think in Australia in some ways we’ve come further because to get the protection you don’t need to be in court necessarily and you can do your deals outside of court with the protection.  There’s obviously a risk of going to court, but the main thing is to try and get people doing deals in society.  So in some ways we’ve taken big leaps forward Leanne.

Leanne:

Can you give us an example of say a recent insolvency process or a company that comes to mind that’s been put into administration and perhaps how things could have gone differently if these laws, these changed laws had been in place?

Tim:

Well look it’s very interesting.  I always think about the Arium insolvency as being a market shifting insolvency.  It happened about 18 months ago.  It was a big business with 6,000 employees and they were doing their restructuring plan and trying to implement that outside of administration and it didn’t work.  I think the safe harbour would have given them a little bit more comfort as they pursued their plan potentially.  

I think about Channel 10 as well, obviously that was another high profile administration recently.  A prolonged period of restructuring activity followed by an administration and I mean nobody really wants to be worried about being sued when they’re trying something to protect creditors.  So I think they’re ones where we may have seen differences.  It remains to be seen.
There’s a number of companies that are going through restructuring at the moment in the public eye Leanne, where I’m sure the directors will be very carefully considering these reforms and maybe changing a little bit about what they do.  But my experience is that most properly advised directors are taking those steps and are following those plans so it will really endorse what people do today.  

I think we will see the real changes in smaller matters where people may not have necessarily thought about having a properly considered plan and seeking advice.  I think directors will be asking about that and maybe being more proactive, and I think that’s a good thing.

Leanne:

What about for the banks in terms of the change of control for the banking space, will they have the same powers to take control of situations in the same way that they do today?

Tim:

It’s a really interesting question because as you see these reforms develop you see the tension between the creditors and the borrower interests in Australian law reform.  So obviously the banks are very powerful and rightly so.  I mean we’ve got a great credit market here.  

I think what you’ll find is that there’s some carve outs to the reforms that are quite important, particularly on ipso facto.  So receivership for example.  There’s been a lot talk about receivership being the banks’ biggest weapon, their biggest remedy.  It has been completely protected by the new reforms.  There was talk during the reform process of receivership being investigated or possibly removed from the processes.  But in fact it’s been protected and made even stronger.  

So I would say that the creditor rights are still extremely strong.  I would expect to see creditors acting earlier in situations where they are alarmed, but I think it really throws it on to the company to engage directly with the banks and their other creditors and to be proactive in showing them that there’s a solution and a pathway forward, getting their support and the laws will back them up if they take those steps.

Leanne:

All right, Tim Klineberg, it’s been a pleasure having you on this morning.  Thank very much for your time.

Tim:

Thanks Leanne, pleasure.

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